Sporttrade’s Kane To Regulators, Lawmakers: For The Sake Of US Sports Betting ‘Something Must Change’

In the ninth paragraph of an open letter to U.S. sports betting regulators and legislators that was published Thursday morning, Sporttrade founder and CEO Alex Kane boiled his mission statement down to two sentences:

“If the goal is to have as many players as possible choosing to play in your regulated market, there must be significant changes to your regulatory approach. You must consider making a sincere effort to welcome innovative companies into your regulated market.”

Nearly seven years after the Supreme Court ruling that allowed for widespread legalization of sports betting, the public conversation around the space has turned decidedly negative — there’s a heavy focus on a rise in problem gambling, a handful of legislators are pursuing paths to undo the legalization in their state, and the threat of federal intervention is turning up its volume and growing increasingly ominous.

Kane’s open letter at Straight To The Point serves as an alternative of sorts to all that negativity. It acknowledges several of the industry’s mounting problems, but does so while pointing to a path forward and aiming for a brighter future.

In a departure from assorted major operators that largely aspire to please their investors, Kane projects a focus on the customer, writing that “without the player, there is no industry.”

His open letter comes at a time when options for reaching customers outside the guidelines of state-by-state regulation is at an all-time high, between operators using the “social gaming with sweepstakes prizing” model, prediction markets governed by the Commodity Futures Trading Commission (CFTC) using a format similar to Sporttrade’s peer-vs.-peer exchange wagering, and the ever-present offshore books.

“If your goal is to maximize participation in your market, something must change: players are increasingly flocking to venues that exist outside of your oversight,” Kane wrote.

Toward the end of his letter, he emphasized: “Let me say in no uncertain terms: without an overhaul that creates a realistic pathway for entrepreneurs to participate in your market, you will cede more tax revenue, jobs, venture capital, and player participation to alternative regulatory frameworks.”

‘Startups aren’t really allowed’

Kane spoke with Casino Reports recently, prior to the release of this letter — and prior to the prediction sites stepping up their push to offer a form of sports betting similar to the exchange model Sporttrade uses as a regulated operator in New Jersey. But many of the themes captured in his open letter were already on his mind at the time of our interview.

“The regulated online sports betting space has not been kind, conducive, encouraging — choose your word — to startups,” he told Casino Reports in December. “And the U.S. is a very interesting case study here because while it is the most entrepreneurial economy in the Western world, bar none, it’s also the one that has the highest barriers entry for this awesome booming market that is online sports betting.

“When it comes to sports betting, startups aren’t really allowed. As a result, we’ve seen, because water runs downhill, we’ve seen DFS and DFS 2.0-like companies, we’ve seen sweepstakes-like companies, aren’t going to give up. They’re just going to figure out a way to operate that allows them to build a business at very little cost. There’s no taxes. There’s a lot of benefits to doing that. And it has the really unfortunate result of sucking up all of the potential funding and energy and capital that should be happening in the legal and regulated market.”

The key to supporting innovation through regulated channels, Kane believes, lies in lowering the barrier to entry for companies without the massive war-chests of FanDuel, DraftKings, BetMGM, Caesars, and so on.

One suggestion comes to mind: “The license fee should be a function of the business’s 12-month revenue.”

Then he got much more specific, with an outside-the-box idea that could potentially solve multiple problems plaguing the industry.

“What you may do is, say, peg the tax rate to the hold rate,” Kane suggested. “It might be as simple as, your tax rate as an operator equals your hold percentage — which every state calculates and publishes — times three. So if you hold 3%, like a Sporttrade or a ProphetX, that equals a 9% tax rate. If you hold 15%, well, that times three equals 45%, now the state’s making more tax revenue. And it effectively says, if you want to make same game parlays the focus of your business, you’ll make more money, but you also have to pay a lot more in taxes.”

No limit to the upside

Naturally, it’s good for the players if the operators are slightly less incentivized to beat the customers by such a massive margin. Perhaps a tax rate tied to hold rate — longshot though that is to become reality — would result in slightly more favorable odds for bettors.

Certainly, having more operators to choose among, with some of them offering different wagering formats than the standard model, is beneficial to the customer. Kane expressed that practices like limiting bettors — a topic of much consternation for the Massachusetts Gaming Commission — would be less destructive if a state had a greater variety of operators.

“If Sporttrade, Prime, and Circa were all in Massachusetts, I think the discussion of all these limited bettors and losing them to offshore sportsbooks, it changes,” Kane said. “You know, FanDuel may limit you, but you have three other regulated operators that are paying taxes, paying license fees, protecting you, holding your funds aside, ensuring you’re betting responsibly in the regulated market in the Commonwealth of Massachusetts.”

On a recent episode of the podcast Business of Betting with Jason Trost, noted gaming attorney Jeff Ifrah pounded a similar drum.

“On day one [when sports betting launches] in Missouri, we already know that DraftKings and FanDuel will have 85 percent of the market,” Ifrah said. “Maybe more. But I’m saying, at a minimum. So how do you, as a startup small business who’s trying to capture market share, go into a market like that, convincing your shareholders, ‘Hey, it’s worth competing with 20 other people for 1 percent’? How do you do that? That’s the constant frustration of trying to compete with what people often call a duopoly.

“When we go [into a new state], everyone wants to talk about small business. When I was in D.C., ‘What are you going to do for small business?’ ‘Well what are you going to do for small business, Mr. or Mrs. Regulator? Are you going to set aside skins? Are you going to make it more favorable? Don’t just say you’re setting aside one skin, or one license, to a small business who has to then compete with extremely high licensing fees and supplier costs that are out the wazoo.’ It’s not enough. It’s not going to happen. So, if you want to say, ‘What’s the problem here? Why isn’t small business participating?’, you have to look at the way you regulate the industry.”

Added host Jason Trost: “The less choice that a consumer has, the more price purchasing power the big players have, and the consumer is the one that ends up paying for that.”

The fewer, the merrier?

Kane didn’t express this viewpoint in his open letter or in his earlier conversation with Casino Reports, but it’s a widely held belief throughout the industry that the major operators didn’t fight against states proposing massive eight-figure licensing fees because those would help limit competition. In other words, the giants helped create fiscal barriers to entry, preferring to absorb the costs themselves rather than compete with scrappy upstarts.

We’ve also seen legislative language pop up in some states that would require licensure in 10-plus other jurisdictions to be considered for a license in the state in question. Certainly, such a rule would keep out those sportsbooks on the “innovator track.”

In the end, what Kane wants — and, transparently, what he wants would be beneficial to Sporttrade’s business — is a door cracked open to welcome a wider variety of operators.

“If a state allowed more startups, you wouldn’t just get more FanDuel replicas for players to choose from, right?” Kane said. “No company is starting up and saying, ‘We’re going try to do what FanDuel’s doing but incrementally better.’ You instead would get more Sporttrades and more ProphetXes and more Novigs and Monkey Knife Fight and PrizePicks and all these differentiated things that look nothing like FanDuel.

“The regulators and legislators should let us entrepreneurs come into the market and try out our totally different ways of thinking about sports betting. Don’t force us to go into the unregulated market. Because, I’m not going to name any names, but that’s what most of these companies are doing under the current system.”